In March 2010, President Obama signed into law the Affordable Care Act (ACA), commonly known as health reform. As part of health reform, beginning in 2018 a 40 percent excise tax will be levied on health insurance policies with premiums in excess of $10,200 for individual policies and $27,500 for family coverage. The tax applies to the portion of premiums between the threshold and the total cost of the insurance policy. The premium thresholds are adjusted for workers in high-risk industries and for the age and gender of the workforce. In 2019 and beyond, the threshold above which premiums are taxed is indexed to the overall inflation rate plus 1 percentage point, not to the growth of medical costs, which is expected to be higher.

As previously noted, in 2019 and beyond, the threshold above which premiums are subject to the ACA excise tax is indexed to the overall inflation rate plus 1 percentage point (CPI+1). For instance, if overall inflation grows at an average rate of 2.5 percent while medical care costs rise at 4.0 percent, a growing wedge will be created between a CPI+1 of 3.5 percent and the growth of medical costs. The result is that more and more insurance plans would be subject to the excise tax, leading more employers and workers to demand lower-priced and less comprehensive coverage. As in the past, this growth rate is expected to be lower than the growth of medical costs, thereby capturing more and more health plans in the future—an increasing number of which by any measure would not be considered “Cadillac.”

The Affordable Care Act’s (ACA) excise tax on high-priced health insurance plans is not well targeted.